July economic update brings good news for education, mixed news for the economy

The July 2013 Economic Update from Minnesota Management and Budget provides good news on the state’s ability to pay back the education funding shifts, but mixed news for the economy.

At the end of the 2013 fiscal year, state revenues were $463 million higher than expected. This was primarily due to an increase in income and corporate tax collections. The update credits some of this activity to economic growth, but most comes from high-income taxpayers shifting income in anticipation of federal tax changes. Because of actions taken during the 2013 Legislative Session, by September the entire positive balance will go toward repaying the remaining $874 million in school funding shifts.

Now to the economy. The U.S. is still recovering from the Great Recession, but the update shows some good news. In the last quarter, job increases were strong, averaging about 200,000 per month nationally, and consumer sentiment is now back in the normal range. However, GDP growth has been slow, and is not expected to grow at a rate that can sustain the national economy long term. Decisions at the federal level, including allowing a payroll tax cut to expire in January and sequestration spending cuts, are believed to be responsible for a 1 percent reduction in GDP growth in 2013. The state’s macroeconomic consultant assigns a 65 percent probability to a slow growth forecast, and a 20 percent probability to a more pessimistic scenario where the national economy narrowly avoids a recession in 2014.

For a strong economy, both Minnesota and the federal government need investments that support our future success. Minnesota is repaying its funding shifts and made many new investments in the last legislative session. Unfortunately, the economy is also feeling the effects of poorly targeted efforts to reduce the federal budget deficit.